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Foreign workers – the rules of taxation

Cseri Zoltán — Wed, 20 Sep 2017 10:00:01 +0000

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Cross-border employment is a key issue in terms of taxation as well since it is important to define the country where the income of workers is taxable.

Foreign workers – how to define tax residence?

When examining the income tax payment obligations of foreign workers in Hungary, the first step is to define their tax residence. To this end we have to examine the Hungarian regulations, but generally the provisions of the convention for the avoidance of double taxation concluded with the country concerned and overriding national law will be more helpful (if there is such a convention between the two countries). In the majority of these conventions, the following aspects can be used to define tax residence:

permanent address
centre of vital interests
habitual abode
citizenship.

This list is also an order, which means that the permanent address is the first step of the examination. If we can clearly define tax residence based on a permanent address, there is no need to investigate any further.

Permanent address

According to Hungarian law, permanent address is an address where private individuals settle for a long-term stay, regardless whether they are the owner or tenant of this property. Another characteristic of a permanent address is that it is continuously available for the person concerned.

Centre of vital interests

If the tax residence of foreign workers cannot be determined unambiguously based on a permanent address, the next step is to examine which country the person’s centre of vital interests is in, i.e. in which country we find their closest personal, family and economic relations. This is not an easy task as there are a number of factors to be considered at the same time. If a foreign individual accepts an assignment in Hungary and is accompanied by their family, then Hungary is likely to be the centre of vital interests in terms of family relations. When considering economic relations, then among other things the place where the person earns and spends their income needs to be taken into account, as well as the countries where they have bank accounts.

Habitual abode

The third step in defining tax residence is habitual abode. Under habitual abode, the tax residence of foreign workers is assigned to the country where the given person spent more days compared to the other country.

Once the tax residence is determined, we need to define the countries where the various types of income are liable for tax. If there is a convention for the avoidance of double taxation between Hungary and the other country concerned, the convention will prescribe the country where the income is subject to tax. National rules are applicable if there is no convention between the countries.

Income from employment

Income earned from employment is taxable in the country of residence if the foreign workers perform the work in that country. If the work is performed in a country other than the country of residence, the income is normally subject to tax in the country where the work is performed, but under certain conditions, taxing rights remain in the country of residence.

Capital gains

In terms of foreign workers’ capital gains, income from interest and exchange gains is normally subject to tax in the country of residence according to the conventions.

Income from dividends belongs to a special category. These incomes are normally subject to tax in the country of residence too, but up to a certain level (10 or 15% depending on the convention) the source country may also impose a tax. The tax deducted in the source country is taken into account under the conventions. For example, if a German citizen working and resident in Hungary receives dividend income from Germany, and a tax amounting to 15% is deducted according to the relevant convention, then no tax is payable in Hungary in relation to this dividend income because the relevant tax rate in Hungary is also 15% (the person still has to submit a tax return though).

Income from real estate utilisation

In line with the conventions, the right to impose tax on income from real estate belongs to the country where the real estate is located.

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Taxation of foreigners’ income in Hungary – definition of tax residency

Kiss Réka — Wed, 05 Apr 2017 04:00:45 +0000

In our previous article we reviewed the most important aspects of the taxation of foreigners’ income in Hungary. Let us take a look at the details now: which factors enable us to define tax residency in the case of a private individual.

What aspects must be considered?

According to the majority of double taxation treaties, when a private individual qualifies as a resident in several countries at the same time based on their address, the issue of tax residency can be decided based on the following aspects:

permanent address
centre of vital interests
habitual abode
citizenship

If, after considering the above factors, it still cannot be decided where the employee qualifies as a tax resident, the countries in question have to agree on the issue.

The above list of criteria is a list of priorities too, i.e. if the tax residency can clearly be determined for the private individual based on their permanent address, no further criteria have to be examined.

Permanent address

Based on both Hungarian legal requirements and OECD guidelines, the residence where the private individual settles down for the long term qualifies as a permanent address. This can be an own or rented house or apartment, or even a permanently used room.

The criterion for a permanent address is that it should be available for the private individual continuously, for use at any time.

Let’s take an example. A Spanish person comes to work in Hungary. He has a house in Spain that he keeps and does not rent out, and he rents an apartment in Budapest. In this case, the person will have a permanent address in both countries since there is an apartment in both countries that is available at any time for use in the long run. However, if he rents out the house in Spain and de-registers there, his permanent address in Spain will cease and he will only have residence in Hungary.

Centre of vital interests

If the private individual has a permanent address in several countries at the same time, specifying the centre of vital interests is the next step in determining residency. The centre of vital interests is in the state in which the private individual has the closest personal, family and economic relationships.

Determining the centre of vital interests entails a complex review. If the Spanish employee above brings his wife and three children to Hungary, it is likely that his closest family relations will tie him to Hungary. However, if his family remains at home and the employee visits them every weekend, then his family relations will continue to tie him to Spain.

When identifying economic relations, the place where income is received and spent also has to be taken into account. If the Spanish individual is employed only in Hungary, and receives income from Spain too but only in the form of dividends, this will tip the scale towards Hungary. Based on OECD guidelines, the circumstance to be reviewed in this case is where the private individual manages his assets from.

During an actual audit, the tax authority even took into account the foreign individual’s bankcard use when determining his residency. In the period under review, the private individual used his bankcard mainly in Hungary, and only rarely abroad. In addition, the private individual had full-time employment in Hungary, while he only had investments abroad, which according to the tax authority did not require any personal presence, as opposed to his employment. The income from the investments was transferred to the private individual’s Hungarian bank account. The NAV considered these facts and established Hungarian tax residency for him. A Curia judgment was also issued in that case.

In addition to the above, the private individual’s political, cultural and other activities have to be taken into account as well.

Habitual abode

Sometimes the above aspects are not enough to determine whether an employee is a Hungarian or a foreign resident; then, habitual abode has to be examined. On this basis the person will be tax resident in the country where they have spent more days.

After defining residency it can be decided where the individual incomes of the private individual are taxable.